Family trust election rules in urgent need of review, government told

The Tax Institute’s head of tax and legal, Julie Abdalla, noted that the ATO presented a fictional case study at the NSW Tax Forum where a family that ran a bus services business was left with a combined family trust distribution tax (FTDT) and general interest charge (GIC) liability of over $67 million due to administrative paperwork errors. 

The Tax Institute explained that there was a profound disconnect between what this tax was designed to do and what it is actually doing.

"It was introduced to stop deliberate trust loss trafficking, and the government at the time said they hoped it would never need to be collected. Instead, we are seeing it wipe out the life savings of working Australian families who had no idea they were exposed," Abdalla added.

"This has devastating flow-on effects for workers and communities affected by business shutdowns. The law needs to catch up with reality, and it needs to do so now."

Deaths in the family, family breakdowns, changes of adviser, and the sheer complexity of the outdated rules are contributing to disproportionate outcomes that were never contemplated when the legislation was drafted, Abdalla said.

In a recent submission to Assistant Treasurer, Dr Daniel Mulino, The Tax Institute made a number of recommendations for fixing the family trust election rules and the related provisions contained in Schedule 2F of the Income Tax Assessment Act 1936 and FTDT.

It has urged the government to introduce a defined limitation period for FTDT liabilities, equivalent to the standard four-year income tax review period, with exceptions for fraud or evasion.

The institute said the government should also consider replacing the GIC with the shortfall interest charge for FTDT, consistent with income tax notices of assessment, so that the GIC is triggered only after an FTDT notice is issued.

It has also called for greater flexibility to vary or revoke elections and to simplify compliance by replacing the approved-form election with a clear statutory requirement that the election is made in the relevant income tax return.

The Commissioner of Taxation should also be granted discretion to make certain decisions about FTDT liabilities, including allowing rectification of honest mistakes or inadvertent errors, where no avoidance behaviour is involved, the institute added.

It also said the government should impose a moratorium on ATO FTDT compliance activity as an interim measure while legislative reform is developed.